Recent New Jersey Insurance Decisions

In a commercial lease agreement it is very common for the landlord and the tenant to agree to defend and indemnify each other in connection with certain claims. Generally, the tenant will agree to defend and indemnify the landlord in connection with claims arising out of the use of the leased premises and the landlord will agree to defend and indemnify the tenant in connection with claims arising out of the use of the common areas, such as parking lots. Commercial lease agreements also commonly require each party to obtain insurance covering their potential liability and to name the other party as an additional insured under the policies.

The duty to defend and indemnify typically is not dependent on obtaining insurance coverage. Thus, if a party fails to obtain insurance coverage, or does not obtain insurance coverage coextensive with its obligation under the lease, that party may still be required to defend and indemnify the other party. In addition, failure to obtain the insurance coverage called for under the lease may give rise to a breach of contract claim.

The duty to defend and indemnify in the landlord-tenant context recently was addressed by the New Jersey Appellate Division in American States Ins. Co. v. Philadelphia Ins. Co., No. A-3693-12T3, 2014 WL 4098135 (App. Div. Aug. 21, 2014). In that case, the tenant, Elite Fitness Centers, LLC (“Elite”), leased space in a shopping mall from Trans Equity Realty, LLC (“Trans Realty”). The lease provided that the leased premises did not “extend beyond the rear wall or window of the proposed store or beyond the actual storefront.” Id. at *1. The lease also required the landlord “to maintain the common areas, which included the stairways, in good condition.” Id.

With respect to the tenant’s obligations to the landlord, the lease provided, in pertinent part:

SECTION 8.01—Tenant, at its sole expense, shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises. All such insurance shall insure performance by tenant of the indemnity provisions of Article XV and shall name landlord, tenant . . . as the insureds.

ARTICLE XV—In addition to any and all other obligations of tenant to indemnify and save landlord harmless as set forth in this lease, tenant will indemnify and save harmless landlord against and from all liabilities, obligations, damages, penalties, claims, costs, charges, and expenses, including without limitation, any and all architect’s and attorney’s fees, which may be imposed upon or incurred by or asserted against landlord by reason of any of the following occurring during the term of the lease:

* * *

(c) any injuries to persons occurring on or about the demised premises;

* * *

Id. In accordance with the lease terms, Elite obtained a liability insurance policy from Philadelphia Insurance Company (“Philadelphia”) and named the landlord as an additional insured. The policy obtained by Elite provided:

WHO IS AN INSURED—[The policy] is amended to include as an insured [the landlord] but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tenant.]

Id. Brett Pessel, a part owner of Elite, was injured while descending a staircase located outside the rear door of the leased premises. The landlord admitted that it was responsible for maintaining the staircase and that it was aware that it was in need of repair prior to the incident.

Pessel subsequently sued the landlord and the landlord’s property manager. The landlord notified its insurer, American States Insurance Company (“American”), of the lawsuit. Approximately 18 months later American notified Philadelphia of the lawsuit and took the position that Philadelphia was required to provide a defense and indemnification to the landlord as an additional insured under Elite’s insurance policy.

Philadelphia refused to defend the landlord, noting that the incident took place outside of the leased premises. In addition, it claimed that it was not obligated to provide a defense or indemnification because Elite was not legally responsible for the injuries. American settled the underlying personal injury action and then commenced a declaratory judgment action against Philadelphia, seeking payment of the settlement amount and attorney’s fees.

The trial court granted summary judgment in favor of American, holding that Philadelphia was required to reimburse American for the amount of the settlement and those attorney’s fees incurred after American “tendered” the lawsuit to Philadelphia. Under New Jersey law, an insurer is not liable for any pre-tender attorney’s fees. The court also held that Philadelphia was liable for the attorney’s fees incurred by American in the declaratory judgment action it commenced against Philadelphia.

On appeal, the Appellate Division affirmed the decision of the trial court. The court rejected Philadelphia’s argument that it was not liable because Elite had no obligation to indemnify the landlord. The court reasoned:

Here, although the landlord was responsible for the common areas, the lease did not confine the tenant’s responsibility to indemnify the landlord to the area within the demised premises. The lease states that the tenant “shall maintain liability insurance . . . insuring against all liability arising out of the use or occupancy of the demised premises.” Consistent with that responsibility, the tenant obtained the additional insured endorsement to the Philadelphia policy, which states the landlord is an insured with respect to liability arising out of the ownership, maintenance or use of the leased premises. In addition, the lease did not state that the landlord would indemnify the tenant for any accident that occurred in a common area.

Id. at 3 (emphasis in original). The court noted that use of the rear staircase “was essential to use of the leased premises.” Id. at 4. Thus, because Mr. Pessel was injured while “using” the leased premises, the court concluded that Philadelphia was required to defend and indemnify the landlord in accordance with the terms of the lease and the insurance policy it issued to Elite.

The court distinguished the facts before it from the facts at issue in Pennsville Shopping Center Corp. v. American Motorists Ins. Co., 315 N.J. Super. 519, 719 A2d 182 (App.Div.1998), certif. denied, 157 N.J.647 (1999). In Pennsville, the lease at issue provided that the tenant was required to indemnify the landlord in connection with liability arising out of conditions “on” the leased premises. The lease further provided that the landlord was solely responsible for the common areas. In that case, a customer of the tenant tripped and fell into a pothole in the parking lot. The Pennsville court held that:

[a]bsent an express and unambiguous contractual undertaking to do so, a tenant cannot logically be seen to be providing insurance to a landlord in respect of a liability for which the landlord has assumed sole responsibility and has agreed to indemnify the tenant . . . . Its undertaking to name landlord as an additional insured must be taken to be coextensive with the scope of tenant’s own liability.

Id. at 523.

In both American States and Pennsville the Appellate Division considered both the terms of the lease and the terms of the insurance policy. There is some support, however, for the proposition that courts should not look to the terms of the underlying agreement where the terms of the insurance policy are unambiguous and self-evident. See, e.g.Jeffrey M. Brown Assocs., Inc. v. Interstate Fire & Cas. Co., 411 N.J. Super. 160, 997 A.2d 1072 (App. Div.), certif. denied, 204 N.J. 41 (2010); Harrah’s Atlantic City, Inc. v. Harleysville Ins. Co., 288 N.J. Super. 152, 159, 671 A.2d 1122 (App. Div. 1996).

In situations where a court does not look to the terms of the underlying contract, the available coverage may be different from what the parties to the underlying agreement actually intended. Regardless of whether a court considers the terms of the underlying agreement, if the insurance policy clearly excludes coverage, a court will not find coverage simply because the insured may be held liable under the lease. Thus, it is important for a party to a lease agreement containing an insurance/indemnification provision to closely review the terms of both the agreement and its insurance policy prior to any loss to confirm that the extent of coverage provided is co-extensive with that party’s obligations under the lease.